Valuations of tech stocks have become insanely high

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What are we to make of a 19 per cent fall in both Facebook and Twitter shares at the end of last week, with Facebook shedding a barely imaginable $120 billion of value in a single day? Of course there are factors relating to performance: Twitter user numbers have been declining and Facebook’s profitability is under threat as it strives to clean up after the Cambridge Analytica scandal. But in short, what the sudden reversal tells us is that valuations of America’s leading tech stocks have become insanely high. The five leaders — Facebook, Apple, Amazon, Netflix and Google, known acronymically as ‘faangs’ — are notionally worth more than the entire FTSE100, while the wider ‘Fang+’ index of high-tech companies listed in New York, including the likes of electric car-maker Tesla, has risen five times faster in recent times than the run-of-the-mill S&P500 index of US companies.

Aficionados say this all makes sense because the tech giants represent the future and still have amazing growth prospects despite occasional setbacks. Sceptics say we’ve heard that before, in the last euphoric run ahead of every major market correction. Analysts at Morgan Stanley have been talking about ‘signs of exhaustion’ in Wall Street’s early summer rally: ‘We think the selling has just begun.’ I stand by my warning a month ago of a bout of market turmoil ‘as early as August’.